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As soon as the Colombian president, Gustavo Petro, came to power, he presented the first draft of what would be the core component of his government: a tax reform that would aim for equality and justice, that would benefit the poor and tax heavily the rich, paying a historical debt to the country and its people. However, as the voices of dissonance grows, fear has also increased that this will provoke a similar reaction to the tax reforms proposed by the previous president, Iván Duque. To this day, the exact number of people who died or disappeared during these confrontations is unknown.
After multiple debates in the Senate, there is still an absence of information about the details of the reforms. For example, it remains unclear how the new taxes will be collected, and how these funds will be spent, though the president has emphasized his desire to resolve financial inequity.
What follows is a review of seven of the key information points about upcoming tax reforms and the potential consequences for certain social groups and industries.
1. Why is tax reform needed?
The Organization for Economic Co-operation and Development, of which Colombia has been a member since 2020, has stated that - within the Colombian fiscal system - there is an overuse of tax exemptions as a way to “fix” structural failures. This impacts not only revenue but also creates a lack of transparency within the system, leading to corruption: an issue Colombia is very familiar with. The Ministry of State has also declared that the aim is tax reform in the name of equality and social justice.
2. What is the goal of the tax reform?
The tax reform should operate on two main axes: reducing poverty and inequality within the country and bridging the gap between the richest and poorest by allowing the latter group to access basic living needs. Here, it is important to bear in mind that Colombia is one of the least equal societies in South America.
The second axis is to make the financial arrangements required to pursue the projects planned and proposed by Petro’s government. Camilo Guevara, a teacher in the Faculty of Economics, Business, and Sustainable Development at La Salle College, states that the project is heavily interested in reducing existing benefits to some people with earnings above a certain percentage, as well as fighting tax evasion.
3. How will the reform affect poor, middle-class, and rich citizens?
The project is expected to reduce monetary poverty in the country by 10%, and the disparity between the richest and poorest by 9%. However, in the short term, poorer people may bear the brunt of the environmental and health taxes, as they are more likely to consume newly-heavily-taxed items such as processed foods and sugary beverages.
Due to this price increase, many families may reconsider what to feed their children. The new taxes will be implemented on top of the pre-existing IVA (Value Added Tax), and Colombians could thus be facing a tax of up to 29% on certain goods like processed, sugary drinks.
Local stores that sell these products will face new taxes. Supermarkets, hairdressers, maintenance services, mechanics, and electricians will also be subject to new taxes, meaning the middle-class workforce is likely to be heavily affected.
Another change will be the taxation of cooperatives that provide important services such as healthcare, education, and access to loans.
Increases to the “Impuesto al Patrimonio” or “wealth tax” will now mean that owners pay tax based on the current value of their property, as opposed to the value of their property at the time of acquisition. This will effectively raise taxes by 200% for approximately the wealthiest 0.02% of the population, or around 10,000 people.
4. Who is going to benefit from the tax reform?
Workers who earn less than 10 million Colombian pesos (COP) per month will not see new taxation on their salaries. Another benefit should be the extended reach of social programs such as Ingreso solidario, which provides families in need with a benefit payment of 400,000 COP every two months. Also supported by the tax reforms will be Programa de Apoyo al Empleo Formal. This subsidizes companies severely affected by the pandemic so they can continue to pay their employees.
5. Which markets will bear the brunt of the reform?
The mining industry, financial firms, food suppliers, convenience stores, supermarkets, the tourist industry, hotels, coffee harvesters, and the housing market could face being taxed up to 37% more.
6. How much is likely to be raised by the tax reforms?
The government hopes the tax reform will increase tax collection by 26 trillion COP (or by about 1.8% of the country’s GDP), in line with the following statistics: 40% of this money should be raised from companies (representing 0.7% of the country’s GDP), 40% from the wealthiest households (another 0.7% of the country’s GDP), and the remaining 20% should be raised from other taxes such as environmental and health taxes (representing 0.4% of the country’s GDP).
7. Who was consulted during the drafting of the project?
The Colombian president has been seen consulting several world-recognized economists such as Mariana Mazzucato and Thomas Piketty, as well as gaining the approval of Joseph Stiglitz.
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